WHAT IS Upside
Upside is the forecasted dollar amount or percentage increase in the price of an investment, and it can be determined using several forms of analysis. Analysts use either technical analysis or fundamental analysis techniques to predict the future price of an investment, particularly stock prices. A higher upside means that the stock has more value than is currently reflected in the stock price.
BREAKING DOWN Upside
Upside refers to the predicted price increase of an investment. Fundamental analysis evaluates the upside price of a stock by considering the ability of the investment firm to generate sales and earnings, and to make effective decisions about company assets. Companies that manage their costs well and increase their profit margins have a higher upside. Businesses can increase sales by moving into new markets or by adding a product line. Money Managers that use fundamental analysis also consider how effectively a business uses assets to generate sales and profits.
Technical analysis is a method that considers the historic patterns in the price of a stock and in the trading volume of a security. Technical analysts believe that price movements are trends, and these managers use charts to determine the upside in a stock’s price. A breakout, for example, occurs when a stock price trades above a recent price trend. If a stock has been trading between $20 and $25 per share, for example, a price move to $28 is a breakout, which is an indication that the stock price has an upside above $28.
Why Upside Matters
Upside not only refers to an investment’s potential gains in value, but is also a concept used to judge the success of a portfolio manager's performance when compared to a benchmark. For many mutual funds, the investment objective is to outperform a specific benchmark, such as the Standard & Poor's 500 index. The upside capture ratio indicates how much upside the mutual fund captures when compared to the benchmark.
Upside also plays a part in short selling. Short selling refers to the sale of stock that an investor does not own. In short selling, the seller must deliver borrowed securities to the buyer by a settlement date. Eventually, the short seller must buy the shares to cover the short position, and the seller’s goal is to buy back shares at a lower price. Short sellers look for stocks that have reached their upside potential, which means the stock is forecasted to decline in price.